The Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March, has provided more than just relief in response to the COVID-19 pandemic. It also contains a beneficial change in the tax rules for many improvements to interior parts of nonresidential buildings, referred to as qualified improvement property (QIP).
Recent History of the Retail Glitch
When the Tax Cuts and Jobs Act was passed in 2017, it contained an inadvertent drafting error by Congress. The error made it so that any QIP placed in service after December 31, 2017, wasn’t classified as 15-year property and therefor wasn’t eligible for 100% bonus depreciation. So, the cost of QIP had to be deducted over a 39-year period rather than over a 15-year period or entirely in the year the QIP was placed in service.
Investments qualifying as QIP generally include upgrades to retail, restaurant and leasehold property. Hence, the problem became commonly known as the “retail glitch.”
The CARES Act Fix
Fortunately, when drafting the CARES Act, Congress fixed the retail glitch. Most businesses can now claim 100% bonus depreciation for QIP — or depreciate it over 15 years — assuming all applicable rules are followed. (Note that improvements related to a building’s enlargement, elevator or escalator, or internal structural framework don’t qualify.)
Because of the slowdown in the U.S. economy, your business (like so many others) may not be in a financial position to undertake a QIP project right away. But when investing in your business is looking feasible, factor this tax break into your considerations for making future property improvements.
Even if you can’t afford to invest in QIP this year, you might be able to enjoy some QIP tax benefits now. The correction is retroactive to any QIP placed in service after December 31, 2017. So if you made eligible improvements in 2018 or 2019, you may be able claim a tax refund.
While claiming 100% bonus depreciation may sound like a no-brainer, keep in mind that in some circumstances it might be more beneficial to depreciate QIP over 15 years. Either option can produce a tax refund for prior years; it’s just the size of the refund that will differ. Maggart can help you determine if your property improvement investments qualify as QIP and, if so, assess whether 100% bonus depreciation or 15-year depreciation is better for you.